Setting and Reaching Intermediate Term Personal Finance Goals

Once our house is bought and furnished, our next goal will be focusing on a pair of vehicle replacements that will occur roughly five years from now. We would truly prefer to pay cash for both vehicles if at all possible, so that means we need to start saving now to reach this goal.

What’s an intermediate term goal? An intermediate term goal is usually centered around a large purchase, often on the order of a year’s salary for most middle class people. This might also revolve around paying off an amount borrowed to make such a purchase, like a car loan or a student loan.

What sets an intermediate term goal apart from other goals? Unlike short term goals, intermediate goals are usually large enough that they can’t be dealt with by using consumer credit. However, unlike long term goals, they aren’t big enough to influence major life choices. They fall into that middle category.

Goals like these require some careful planning, because left unattended, these goals can fall apart on you and can also ensnare you in debt.

Clearly define the goal. What are you actually shooting for? Usually, it’s to completely pay off a debt or to make a significant purchase in cash (like an automobile). Nail down exactly what you’re trying to do, then do the math to see how much money you’ll need to make it happen.

Break the goal down into short term goals. Set up annual milestones, then treat these milestones as short term goals. For example, you might set a goal of saving $5,000 towards an automobile each year so that in five years you can buy a late model used Lexus (something we’ve discussed). Then that $5,000 becomes a short term goal, one that you can focus on using short term techniques.

Allow your savings to not be liquid for short periods. This means that if you have an option to buy a certificate of deposit that returns 6% and it clearly ends before your goal arrives, don’t hesitate to go for the good return. The rest should still go in a high-interest savings account. Over periods of less than ten years, I don’t feel confident in the stock market as a good place to store your money.

Be diligent. One big advantage of breaking it down into short term goals is to make sure you’re making progress all the way along. Don’t fluff it off because it seems far away – do whatever you need to do to keep the goal immediate.

Here’s a real example of an intermediate goal. As I mentioned above, my wife and I are focusing on buying two autombiles in five years’ time. We haven’t determined the exact division yet, but combined we are targeting $30,000 in savings. In order to meet this goal, we have broken it into five short term goals in sequential years to save $6,000 each year. Given that we’re expecting a 5.5% annual return on this money, we’re investing $100 each week, which by our calculations gets us very close to the $30,000 mark in 5 years. One advantage is that we’re both willing to continue driving our current late model used cars (well, relatively late model) until they give out on us, so once we reach this goal, that doesn’t mean we immediately buy a car. When we have that car fund built, we celebrate because we’ve reached that goal – and then we find another good use for that $100 a week.

Of course you can’t be sure when either of your cars will give out, but do you plan to replace both of them at (about) the same time? Wouldn’t it make more sense to stagger the purchases, if possible, so you’re not always trying to replace both at once?

Also, why a Lexus? (I don’t think you’ve discussed this before.) It seems it would be more expensive to maintain than, say, a Toyota Camry or equivalent Subaru. (Then again, I don’t have a car, so I also don’t have a clue!) I know you will do your homework re: safety, reliability, etc., but a Lexus seems counter to your unpretentious philosophy.

Finally, something that relates a little to this post: When I was buying my first brand new car, my parents balked at the fact that the cost was, as you noted, nearly as much as my yearly salary. When they bought their first new car, it cost less than 1/3 of their annual income.

Lexus had three sedans in the top seven most reliable sedans of 2006, according to CNN (based on predictions from Consumer Reports). Those cars are exceptionally reliable and of high quality and their reliability inherently cuts down on maintenance costs.

Most late cars you buy are expensive to maintain regardless of brand because so much is computer controlled–it’s not easy anymore to repair or maintain a car yourself beyond the occasional oil change or tune-up. If something goes wrong on a modern car, it’s usually pretty expensive. But from what I’ve read, Lexus has the fewest problems.

Lexus is a good choice. In fact, if I don’t get another older Volvo, Lexus is next in line!

Trent, how do you track these goals? A savings account for each seems excessive and, maybe I am missing it, but I haven’t been able to make Quicken or Money handle these types of goals within 1 account. It’s just an issue that I’ve been struggling with, so I appreciate the time of your articles.

I don’t believe for one moment you are the type of guy to drop 30k cash on cars. To have that amount of money, disposable, opens up a world of investment opportunities you wouldn’t pass up.
My take on this (and I have had a modicum of financial success) would be to drive junk and put the 30k down on a duplex home that needs some work and would rent well, perhaps it could be triplexed with a few changes (a for instance).

1five9,
I am starting with the “savings accounts for specific things route” and I agree that a seperate one for each goal would be a bit much. I have a few thoughts on this:
1) Set up, like Trent has done, a “big item” account. Then if you have multiple purchases in the future determine how much for each per week you need to set aside ($125 for car, $50 for stove, $80 for bathroom upgrade, etc…) and have that total amount automatically withdrawn each week (or another time period). To keep track of your progress, I suggest a simple spreadsheet with columns for each item.

2) Or you can make 3 seperate accounts, one for each of short, intermediate, and long term goals. If multiple items fall in each account then a spreadsheet could be useful too.

3) I haven’t used Microsoft Money yet (it is one if my short term goals) but dig a bit deeper to see if you can categorize things within accounts.

This means that if you have an option to buy a certificate of deposit that returns 6% and it clearly
Hi Trent,
Excellent Post. Can you point me in the direction of a CD that returns 6%?
Thanks,
Pittsburgh

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